Back in red: Minnesota faces $1.2 billion deficit

Minnesota will limp into the new year with a $1.2 billion budget deficit that threatens aid for local police and fire departments, health care for the poor and even public schools.

The shortfall through mid-2011 and a $5.4 billion deficit forecast for the following two years are the latest in a series of budget problems that have had Gov. Tim Pawlenty and the Legislature in cutting mode since 2007.

"It seems like deja vu in some ways," said Senate Minority Leader Dave Senjem, R-Rochester. "You've got two choices. We all know those choices. We lived them and relived them. You live within your means or you raise taxes."

That familiar dispute, which has played out repeatedly between the Democratic-controlled Legislature and Republican governor, was taking shape anew.

Pawlenty called the problem "significant but solvable" and vowed to tackle the immediate deficit by cutting spending without raising taxes. Top legislative Democrats raised doubts about whether that was possible _ or wise.

"Minnesota for a while has been guided by slogans and Band-Aid responses," said House Speaker Margaret Anderson Kelliher of Minneapolis, one of several candidates vying to replace Pawlenty in next November's election. The governor has said he won't run for a third term.

Kelliher and other party leaders wouldn't rule out trying to enact a tax hike over Pawlenty's objections. House Minority Leader Kurt Zellers, R-Maple Grove, said flatly that there wouldn't be the GOP defections necessary to override a veto.

Few specific plans emerged on the day when finance officials delivered the bad news. The main culprit is lower income tax collections due to depressed wages and unemployment. The state is on pace to lose 154,000 jobs from its pre-recession peak, with 131,000 already gone.

Management and Budget Commissioner Tom Hanson said he expects the effects of the downturn to linger.

"The recovery will be long, slow and bumpy, and it will be one of the slowest on record," Hanson said.

Lawmakers' options are limited, with a fifth of the two-year budget already spent. The $1.2 billion deficit represents 5 percent of what's left. Pawlenty warned that the state burns through about $40 million to $50 million a day.

The Minnesota Constitution requires the state to have balanced books at the end of each budget cycle, with the current one ending June 30, 2011. Another forecast will be produced by early March, about a month after lawmakers begin their 2010 session.

Pawlenty said he was considering halting portions of a $400 million payment to local governments due to go out just after Christmas. He has the power take that action on his own, as he did this summer when he cut or delayed $2.7 billion in planned spending for a range of programs.

Jim Miller, president of the League of Minnesota Cities, said the focus should be elsewhere. Cities have lost almost $130 million in state aid since last year, and another $128 million in cuts are on tap in 2010.

Lawmakers plan to convene hearings in December and January even though they can't take any votes until February. They urged Pawlenty to put forward his solution quickly.

Pawlenty said he already ordered agency heads to hold back 3 percent of their unspent money. Most budget areas will be considered for cuts, including public schools, which consume almost 40 cents of every dollar the state spends. The governor said he is alarmed by wage hikes in some recently negotiated teacher contracts.

"We asked them to freeze salaries. We asked them to freeze compensation levels. But many of them have not done that," Pawlenty said. "We have historically protected them, but let's just say I'm a little frustrated with appears to be their lack of putting their spending in the context of these times."

Along with the governor's office, all 201 legislative seats are on November's ballot. Meanwhile, Pawlenty appears to be lining himself up for a possible White House campaign in 2012.

Jim Monroe, the executive director of the Minnesota Association of Professional Employees, told Pawlenty to "put your presidential aspirations on hold, focus on the job you were elected to perform, sit down with us and work together to resolve the state's ongoing economic crisis."

Pawlenty dismissed suggestions his personal ambition was ahead of the state's future, insisting he hasn't decided if he'll run for president.

The state had a mammoth budget deficit when Pawlenty took office in 2003, and 10 of the 14 twice-yearly forecasts during his tenure have shown deficits. The deficit figure for the next budget _ in 2012-13 _ assumes the state will repay $1.7 billion in delayed aid to schools but doesn't factor in inflation.